01Cold open: Friday built it, Monday tore it down
Last week, Friday's option board was built for a rally. Calls bought back, puts written, volatility crushed. Every signal pointing towards a gap up on Monday. It took the market one session to take the whole thing apart. Yesterday, 6.59 crore calls were written and 1.89 crore puts were bought back. And I am still buying the dip, with the target above all of it.
02The receipt: the 23,900 call landed
One thing first, briefly, because I put it on record yesterday. I said the first question was not whether we take 24,000, it was whether we reclaim 23,900, and that if we failed there the people who wrote the puts at that strike on Friday were in deep trouble. The high was 23,890. It never touched it, by 10 points. The 23,900 put went from 59.85 to 128.80, more than doubling, and 75.84 lakh of open interest came off as the writers bought themselves out. I also said Infosys being down 3.23 percent in New York was the tell for IT. Infosys fell 3.76 percent yesterday over here.
03The tape: out of IT and into pharma
The Nifty closed 23,779, down half a percent. It opened at 23,883, made a high of 23,890 in the first few minutes and spent the rest of the day going down, to 23,737. Thirteen up and 37 down inside the Nifty 50, and 1,096 up against 1,760 down across the full market. The Sensex fell the same half a percent, and its low was not its close, ending a four session streak. India VIX is back above the 11 mark. Nifty IT fell 2.28 percent and it was not one name, it was ten of ten across the board. The other side was also violent. Anuh Pharma plus 12.21 percent, Sakar plus 10.37, Star plus 10.04, Themis Medicare plus 10.04, Hikal plus 9.54, Solara plus 9.49, IOL Chemicals plus 7.72. Thirty five pharmaceutical names up more than 2 percent, the most of any industry. So the money did not leave the market. It walked out of IT into pharma in one session.
04The board: one session undid four days of writing
Call open interest rose 6.59 crore, put open interest fell 1.89 crore, and the put call ratio went from 0.844 down to 0.556. On Friday it was the exact opposite, 1.07 crore of calls covered and 2.90 crore of puts written. One session undid four days of writing. Strike by strike: 23,800 is the biggest one, and 1.51 crore calls were written into it in a single session. 23,900 took 1.19 crore calls and 23,850 took 1.07 crore. They sold calls at every strike from 23,750 up to 24,000. And on the put side, 23,900 lost 75 lakh puts, 23,950 lost 41 lakh and 24,000 lost 27 lakh. So they bought back every put written on Friday.
05The pin: both sides defend one price
Max pain stands at 23,800, only 21 points above where we closed, and the same strike took the largest call build of the session. So it is the magnet and it is the first obstacle in the way of anything higher. Implied volatility stands just below the 12 percent mark, which is normal for the day before. One standard deviation is around 144 points and the 23,800 straddle implies about 160. And one more thing that closes a story I have run all week. The September basis is at 88 points. That run was 34, then 85, then 126, then 150. Yesterday it gave back 62 points in one session. But the futures open interest rose by seven lakh. So this was fresh selling at a lower premium, not unwinding. I kept saying the cash had never validated that premium. The futures came to the cash. The cash did not rise.
06Positioning: the crowd sold into the fall
And one thing that should worry you and me as well. The retail naked put book went from 7.16 lakh to 8.89 lakh. They sold 1.73 lakh more puts in a single session. That is the most worrying part, into a falling market on the eve of expiry, a new high for this run, and Friday's reduction lasted exactly one day. The pros flipped back to net short calls, the eighth flip in 12 sessions. The foreign futures short went to 2 lakh 50,000, another run high, in a book that has been rising every single session. In cash the foreigners actually bought 280 crore, the first buying day in a while. Overnight, GIFT Nifty is at 23,802, down 24 points. The Dow futures are down 0.63 percent and have kept falling from minus 0.4 yesterday evening. And Asia has cooled: the KOSPI is still up 1.75 percent, but the Nikkei has come back to plus 0.3 from plus 2.08 and Taiwan to plus 0.03 from plus 1.64. The North Asia surge we were not part of has burned itself out in one session. Brent is back to 97, so oil has paused, and the yen is up another 2 percent at 153.16, the biggest single currency move of this run.
07The plan: a squeeze case, not a drift case
I am constructive today with a caveat. A flat to marginally lower open near 23,760 to 23,790. My view for the expiry is buying the dips towards 23,700, with the target at 23,900, above that magnet and into positive gamma territory. That buy zone is the real support on the board: 23,700 carries 94 lakh puts and 23,600 carries a crore. It also sits a full standard deviation below the pin, so you are being paid to wait for it. Do not chase the open, let it come to you. Now let me be straight about the target, because it is not a free lunch. 23,900 is around 121 points from yesterday's close, one standard deviation is 144 and the straddle implies 160. So the lower half of the target is inside a normal day's move and the upper half needs an outsized one. And here is the obstacle: those 1.51 crore calls written at 23,800 sit directly in that path. So max pain is below my target. The option board is not positioned for 23,900, it is positioned against it. Which is exactly why, if we get there, those writers become the fuel. That is a squeeze case, not a drift case. The structure I am holding is an iron fly: selling the 23,900 body and buying a 23,700 put and a 24,100 call. The credit at the close is roughly 130, the max loss around 70, so one to 1.8, with maximum profit exactly at 23,900, the bottom of my target, and the whole target zone in profit. It gets better if the dip comes. I am holding this into the settlement, not scalping it, so size accordingly. Below 23,700 I am staying on the sidelines. And today is an expiry into a cash session, so close your positions by 3:15 without fail, and do not carry any naked position, neither the long nor the short side.